Will Obama’s $100 Million Microfinance Growth Fund Be Effective?

by Shu on May 12, 2009

in News

 

QAt the Summit of the Americas last month, US President Barack Obama

 

announced a $100 million "Microfinance Growth Fund for the Western Hemisphere," which the White House says will help microfinance institutions "rebuild their capacity to lend during this difficult period." Do you think the program will achieve its stated goal? How quickly will these funds reach microfinance institutions? What more should be done to help the microfinance sector in the midst of the current credit crunch?

 

AGuest Comment: Carlos F. Gonzalez: "President Obama’s announcement during

 

the Fifth Summit of the Americas of anew $100 million Microfinance Growth Fund (MGF) marks an important step in the region’s long-term potential for development. A leader in the microfinance movement since the 1970s, Latin America is home to some of the most-developed microfinance institutions in the world. Unfortunately, the global economic crisis now threatens these institutions’ ability to access much-needed funding sources. Yet, unlike others, Latin America’s microfinance institutions have a proven track record of success, and the talent and experience to continue positively impacting theregion so long as there is enough money. For the MGF to be truly effective, it must act now. The fund must be structured without delay. This requires the development of a lending strategy and the placement of a management team. Next, the fund must increase the current level of’ market penetration’ within the region. Although Latin America boasts some ofthe highest penetration rates in the world, the numbers show significant disparity among individual countries. The International Finance Corporation reports microfinance penetration rates of 3 percentin Brazil and Argentina, while Paraguay, Chile and Peru boast rates of up to 35 percent. Bolivia is the clear leader with a 160 percent penetration rate, meaning microfinance borrowers may simultaneously draw upon multiple sources of financing in the country’s saturated market. To increase market penetration, the MGF must promote, as part of its lending strategy, the expansion of lending services in rural areas. By setting up small outlets in easily accessible locations like pharmacies, microfinance institutions can pursue the same strategies used by banks to expand traditional services to otherwise neglected populations. These strategies together will advance the important goals of microfinance institutions."

 

AGuest Comment: Rob Scarlett: "The micro-lending movementoriginated in Recife,

 

Brazil, inthe early 1970s, so it is entirely appropriate that this microfinance initiative be dedicated to support the economically active poor in the WesternHemisphere. The amount of capital available for on-lending to these tiny businesses has grown steadily, but in the wake of the global financial crisis, the rate of investment has been declining. In hard economic times, microfinance institutions with a social mission (servingthe poorest of the economicallyactive poor in the Americas) have fared better than upper-tier financial institutionsin the same countries. Funds invested in these financially sustainable MFIs will be able to pay a reasonable rate of return while also reducing economic hardship in the poorest areas of the Americas. During hard times, these informal microenterprises serve as a "safety valve." As more people slip into poverty, they engage in supplemental economic activity in order to survive. In these times, it is reasonable to expect greater demand for microloans. It is important that the Microfinance Growth Fund be invested in social-mission-driven, financially sustainable, microfinance institutions (MFIs). This focus will ensure the greatest possible impact onpoverty in the region. If the Obama administration also encourages increased research on the social impact of microfinance and the universal adoption of standards and procedures forprotecting the interests of MFI clients, then the longer-term beneficial impact of this Microfinance Growth Fund will be that much greater."

 

ABoard Comment: Franco Moccia: "President Obama’sannounced proposal to

 

create a $100 million fund to rebuild microfinance capacity in the WesternHemisphere is a good idea, however its impact will be very limited due to its size. A $100 million fund for the Western Hemisphere will not generate the proposedgoal. This amount will have an impact only if it is dedicated to one or two medium-sized countries in the region. The main problem that the microfinance institutions are facing today as a consequence of the credit crunch is the lack of interest of foreign lenders to continue providing financing due to country, foreign exchange and liquidity risks. The US government can help to mitigate the problem in a more effective way directly or via the regional multilateral institutions offering contingent facilities or partial guarantees. They would cover cross border, foreign exchange or liquidity risk. The funding would be provided by the private sector but the US government or the multilateral institution would take the mentioned risk totally or partially. This contingent risk-taking system would generate more impact than lending directly as the funding will come from the traditional sources. Alignment of incentives can be reached avoiding full coverage with a partial guarantee model."

 

Carlos F. Gonzalez is a partner at Diaz, Reus & Targ, LLP in Miami.

Rob Scarlett is an advisor to the Microfinance Alliance in Minneapolis.

Franco Moccia is a member of the Financial Services Advisor board and an independent advisor based in Miami.

 

 

Comments on this entry are closed.

Previous post:

Next post: